Battle lines are drawn in the bid to tax foreign reinsurers in the USA. David Banks assesses the battlefield from the opposing front lines.
After months of political haggling and quiet campaigning, the war is just beginning in the reinsurance world’s most urgent fight.
A bill that would tax foreign reinsurers on their US earnings, being pushed by congressman Richard Neal and backed by a clutch of major American insurers, could be heard by the US Congress in the final months of this year. The Neal Bill, as it is known, could even be joined to unrelated legislation and fast-tracked for an early approval.
For US insurers backing the bill, there is an obvious advantage in seeing their foreign competitors taxed.
The current economic climate has made it easier for protectionist legislation that brings the promise of extra revenues for the US Treasury. The only concern for those backing the Neal Bill is whether they can duck the blame when insurance premiums start to rise.
It is not a clear-cut battle: not everyone in the US backs the bill. Many large insurers oppose protectionism as a matter of principle, or fear the effects that a rash of similar laws in other markets could have on their business. Plus, smaller insurers like those in peak peril areas of the US Gulf Coast and Florida worry about the effects of higher reinsurance pricing on their business.
Opposition to the bill in the US comes from the Coalition for Competitive Insurance Rates (see box, below right), a group of US consumer and insurance industry bodies including the Florida Consumer Action Network and the Risk and Insurance Management Society.
ALL ABOUT THE MONEY
The rhetoric around the Neal Bill has focused on tax avoidance through offshore entities. In Richard Neal’s three-minute speech, introducing the bill to Congress on 31 July, he mentioned “offshore” eight times and “Bermuda” three times.
Opponents describe this focus as a “smokescreen” when one considers that the bill would have an equal impact on all non-US insurers, including those based in continental Europe and the London market, not just lower-tax environments. No legislation can target a specific country and be consistent with the GATS (General Agreement in Trade and Services) principles.
Earlier moves for a foreign reinsurer tax have been defeated twice (in the early 1990s and in 2001), thanks to criticism that it would be a protectionist tax that would increase consumer costs.
This time, however, the situation is different. The US government needs to claw back the billions it has spent shoring up financial institutions.
The question decision-makers will have to ponder is whether their desire for extra revenue overrides their fear of being blamed by consumers for higher insurance costs.
Another difference this time is that a respected and influential politician is pushing the bill. As chairman of the Subcommittee on Select Revenue Measures, Richard Neal is already plugged in when it comes to the tax and regulation process.
WILL THE NEAL BILL BECOME LAW?
Richard Neal may feel that the chances of passing the bill are better if a separate hearing is not held. Instead, the tax plan could be bolted onto an unrelated piece of legislation as the means to pay for that piece of legislation – also known as a “payfor amendment”.
As such, things are expected to move once a revenue estimate has been calculated for the bill.
Opponents of the bill have focused their argument on what they call the bill’s “anti-consumer” credentials, saying it has untold costs for the average American homeowner. Michael Butt, chairman of Axis and of the Association of Bermuda Insurers and Reinsurers, says:
“We have rallied our constituency, from reinsurers to local US insurers and grass-roots policyholder organisations. We are getting the message across, but there is still a real fear that this might be put through.”
Aon Benfield chairman Michael O’Halleran thinks there is little chance of the Obama administration entertaining the bill any time soon. He says: “There are so many issues for this administration that it is almost doomed for getting onto the 2010 agenda.”
Backers of the Neal Bill say it wouldn’t cost consumers any more and that foreign (re)insurers could happily absorb tax costs without needing to recoup costs on their balance sheets.
Foreign reinsurers believe this part of the argument is “pure fantasy”, “a magic trick" and that prices would soon rise.
With powerful supporters on both sides, this is a debate that will continue to rage for some time, with the full impact on the global reinsurance industry yet to be seen.
David Banks is deputy editor of Global Reinsurance
For the Neal Bill
Richard Neal, political proposer: democrat from Massachusetts, member of the Ways and Means Committee, chairman of the Subcommittee on Select Revenue Measures.
He says: â€œIt is precisely the time to shore up the US market.â€
The Coalition for a Domestic Insurance Industry, whose members include:
Ambac Financial Group
American Financial Group (AFG)
Carl H Lindner III, co-chief executive and co-president of AFG, says: â€œIn light of the increases in government spending associated with rescue plans for the US economy, we believe that it is likely that additional revenue sources will be sought.
We believe that the current political environment will be helpful in achieving the fairness we desire in this proposal.â€
W. R. Berkley Corporation
William Berkley, chairman and chief executive of W. R. Berkley, says: â€œForeign insurers have mounted an aggressive campaign to preserve this loophole and their unfair competitive advantage.â€
Berkshire Hathaway, with chairman and chief executive Warren Buffett
The Chubb Corporation
John Degnan, Chubbâ€™s vice-chairman and chief operating officer, comments: â€œGiven the condition of our national budget's enormous and growing deficits, Congress should not permit the erosion of the US tax base.â€
EMC Insurance Companies
The Hartford Financial Services Group
Liberty Mutual Group
Jay Brown, chief executive of MBIA, says: â€œWe hope that the bill will be passed quickly in order to limit further erosion of the tax base and to guarantee a level competitive playing field across the insurance industry.â€
Scottsdale Insurance Company
The Travelers Companies
Zenith Insurance Company